What is martin after-tax consumption in period two

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Reference no: EM131113094

Martin lives for two periods, earning $50,000 in income in period 1, which he consumes or saves for period 2. The interest rate on his saving is 10% per year. Interest income is taxed at rate τ = 30%.

(a) Draw Martin’s intertemporal budget constraints with and without tax. Label all intercepts and slopes on your graph.

(b) Suppose that Martin saves $15,000 if there is no tax on saving. With tax, the income and substitution effect exactly cancel out so that the tax has not effect on his savings. Draw a set of indifference curves consistent with this response.

Reference no: EM131113094

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